Ocwen Financial Corporation
OCWEN FINANCIAL CORP (Form: 10-Q, Received: 10/31/2014 06:01:11)



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q  
(Mark one)
T
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended September 30, 2014
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from: ____________________ to ____________________
Commission File No. 1-13219
OCWEN FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
Florida
 
65-0039856
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
1000 Abernathy Road NE, Suite 210
Atlanta, Georgia
 
30328
(Address of principal executive office)
 
(Zip Code)
(561) 682-8000
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes T No £
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes T No £
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:
 
Large Accelerated filer
T
 
 
Accelerated filer
£
 
Non-accelerated filer
£
(Do not check if a smaller reporting company)
 
Smaller reporting company
£
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act) Yes £ No T
Number of shares of common stock outstanding as of October 27, 2014 : 125,814,811 shares







OCWEN FINANCIAL CORPORATION
FORM 10-Q
TABLE OF CONTENTS
 
 
 
 
PAGE
PART I  - FINANCIAL INFORMATION
 
 
Unaudited Consolidated Financial Statements
 
 
 
 
 
 
Consolidated Balance Sheets at September 30, 2014 and December 31, 2013
 
 
 
 
 
 
Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2014 and 2013 (As Restated)
 
 
 
 
 
 
Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2014 and 2013 (As Restated)
 
 
 
 
 
 
Consolidated Statements of Changes in Stockholders’ Equity for the Nine Months Ended September 30, 2014 and 2013 (As Restated)
 
 
 
 
 
 
Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2014 and 2013 (As Restated)
 
 
 
 
 
 
Notes to Unaudited Consolidated Financial Statements
 
 
 
 
 
Management’s Discussion and Analysis of Financial Condition and Results of Operations (As Restated for 2013 Periods)
 
 
 
 
 
Quantitative and Qualitative Disclosures about Market Risk
 
 
 
 
 
Controls and Procedures
 
 
 
 
PART II  - OTHER INFORMATION
 
 
Legal Proceedings
 
 
 
 
 
Risk Factors
 
 
 
 
Item 2.
 
Unregistered Sales of Equity Securities and Use of Proceeds
 
 
 
 
 
Exhibits
 
 
 
 


1



FORWARD-LOOKING STATEMENTS
This Quarterly Report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements, other than statements of historical fact included in this report, including, without limitation, statements regarding our financial position, business strategy and other plans and objectives for our future operations, are forward-looking statements.
These statements include declarations regarding our management’s beliefs and current expectations. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “could”, “intend,” “consider,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict” or “continue” or the negative of such terms or other comparable terminology. Forward-looking statements by their nature address matters that are, to different degrees, uncertain. Forward looking statements involve a number of assumptions, risks and uncertainties that could cause actual results to differ materially from those suggested by such statements. Accordingly, you should not place undue reliance on any forward-looking statement. Important factors that could cause actual results to differ include, but are not limited to, the risks discussed in “Risk Factors” in Amendment No.1 to our Annual Report on Form 10-K for the year ended December 31, 2013 and the following:
uncertainty related to legislation, regulations, regulatory agency actions, government programs and policies, industry initiatives and evolving best servicing practices;
uncertainty related to claims, litigation and investigations brought by government agencies and private parties regarding our servicing, foreclosure, modification and other practices;
the characteristics of our servicing portfolio, including prepayment speeds along with delinquency and advance rates;
our ability to grow and adapt our business, including the availability of new loan servicing and other accretive business opportunities;
uncertainty related to acquisitions, including our ability to close acquisitions and to integrate the systems, procedures and personnel of acquired assets and businesses;
our ability to contain and reduce our operating costs;
our ability to successfully modify delinquent loans, manage foreclosures and sell foreclosed properties;
our ability to effectively manage our regulatory and contractual compliance obligations;
the adequacy of our financial resources, including our sources of liquidity and ability to fund and recover advances, repay borrowings and comply with debt covenants;
the loss of the services of our senior managers;
uncertainty related to general economic and market conditions, delinquency rates, home prices and disposition timelines on foreclosed properties;
uncertainty related to the actions of loan owners, including mortgage-backed securities investors and government sponsored entities, regarding loan put-backs, penalties and legal actions;
uncertainty related to the processes for judicial and non-judicial foreclosure proceedings, including potential additional costs or delays or moratoria in the future or claims pertaining to past practices;
our reserves, valuations, provisions and anticipated realization on assets;
our ability to effectively manage our exposure to interest rate changes and foreign exchange fluctuations;
our credit and servicer ratings and other actions from various rating agencies;
our ability to maintain our technology systems and our ability to adapt such systems for future operating environments;
failure of our internal security measures or breach of our privacy protections; and
uncertainty related to the political or economic stability of foreign countries in which we have operations.
Further information on the risks specific to our business is detailed within this report and our other reports and filings with the Securities and Exchange Commission (SEC) including Amendment No.1 to our Annual Report on Form 10-K for the year ended December 31, 2013 , Amendment No.1 to our Quarterly Report on Form 10-Q for the three months ended March 31, 2014, our Quarterly Report for the three months ended June 30, 2014 and our Current Reports on Form 8-K. Forward-looking statements speak only as of the date they were made and except for our ongoing obligations under the U.S. federal securities laws, we undertake no obligation to update or revise forward-looking statements whether as a result of new information, future events or otherwise.



2

PART I – FINANCIAL INFORMATION
ITEM 1. UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
UNAUDITED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share data)



 
September 30, 2014
 
December 31, 2013
Assets
 

 
 

Cash
$
299,163

 
$
178,512

Mortgage servicing rights ($101,948 and $116,029 carried at fair value)
1,958,766

 
2,069,381

Advances
987,286

 
890,832

Match funded advances
2,359,579

 
2,552,383

Loans held for sale ($335,950 and $503,753 carried at fair value)
407,887

 
566,660

Loans held for investment - reverse mortgages, at fair value
1,315,324

 
618,018

Goodwill
420,201

 
420,201

Receivables, net
245,817

 
152,516

Deferred tax assets, net
79,470

 
115,571

Premises and equipment, net
44,907

 
53,786

Other assets
237,240

 
309,143

Total assets
$
8,355,640

 
$
7,927,003

 
 
 
 
Liabilities, Mezzanine Equity and Equity
 

 
 

Liabilities
 

 
 

Match funded liabilities
$
2,035,639

 
$
2,364,814

Financing liabilities ($1,854,949 and $1,249,380 carried at fair value)
2,057,490

 
1,266,973

Other secured borrowings
1,666,427

 
1,777,669

Senior unsecured notes
350,000

 

Other liabilities
631,641

 
644,595

Total liabilities
6,741,197

 
6,054,051

 
 
 
 
Commitments and Contingencies (Note 22)


 


 
 
 
 
Mezzanine Equity
 

 
 

Series A Perpetual Convertible Preferred stock, $.01 par value; 200,000 shares authorized; 62,000 shares issued and outstanding at December 31, 2013

 
60,361

 
 
 
 
Equity
 

 
 

Ocwen Financial Corporation (Ocwen) stockholders’ equity
 
 
 
Common stock, $.01 par value; 200,000,000 shares authorized; 127,467,805 and 135,176,271 shares issued and outstanding at September 30, 2014 and December 31, 2013, respectively
1,275

 
1,352

Additional paid-in capital
567,025

 
818,427

Retained earnings
1,052,236

 
1,002,963

Accumulated other comprehensive loss, net of income taxes
(8,784
)
 
(10,151
)
Total Ocwen stockholders’ equity
1,611,752

 
1,812,591

Non-controlling interest in subsidiaries
2,691

 

Total equity
1,614,443

 
1,812,591

Total liabilities, mezzanine equity and equity
$
8,355,640

 
$
7,927,003



The accompanying notes are an integral part of these unaudited consolidated financial statements

3


OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share data)

 
For the Three Months Ended September 30,
 
For the Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
 
 
 
(As Restated)

 
 
 
(As Restated)

Revenue
 
 
 
 
 
 
 
Servicing and subservicing fees
$
465,964

 
$
483,267

 
$
1,448,096

 
$
1,333,392

Gain on loans held for sale, net
27,218

 
28,262

 
110,041

 
72,912

Other revenues
20,516

 
19,711

 
59,896

 
76,014

Total revenue
513,698

 
531,240

 
1,618,033

 
1,482,318

 
 
 
 
 
 
 
 
Operating expenses
 
 
 
 
 

 
 

Compensation and benefits
99,879

 
118,054

 
316,118

 
330,679

Amortization of mortgage servicing rights
60,783

 
79,183

 
186,075

 
197,435

Servicing and origination
49,739

 
34,236

 
129,473

 
89,740

Technology and communications
44,261

 
38,809

 
121,234

 
102,698

Professional services
160,704

 
19,090

 
212,745

 
99,228

Occupancy and equipment
24,697

 
30,786

 
82,504

 
74,631

Other operating expenses
14,976

 
26,102

 
101,547

 
66,007

Total operating expenses
455,039

 
346,260

 
1,149,696

 
960,418

 
 
 
 
 
 
 
 
Income from operations
58,659

 
184,980

 
468,337

 
521,900

 
 
 
 
 
 
 
 
Other income (expense)
 
 
 
 
 
 
 
Interest expense
(133,049
)
 
(116,885
)
 
(409,129
)
 
(319,564
)
Gain (loss) on debt redemption

 
1,282

 
2,609

 
(12,556
)
Other, net
2,124

 
68

 
14,797

 
9,115

Total other expense, net
(130,925
)
 
(115,535
)
 
(391,723
)
 
(323,005
)
 
 
 
 
 
 
 
 
Income (loss) before income taxes
(72,266
)
 
69,445

 
76,614

 
198,895

Income tax expense (benefit)
2,992

 
8,873

 
24,374

 
23,752

Net income (loss)
(75,258
)
 
60,572

 
52,240

 
175,143

Net income attributable to non-controlling interests
(123
)
 

 
(165
)
 

Net income (loss) attributable to Ocwen stockholders
(75,381
)
 
60,572

 
52,075

 
175,143

Preferred stock dividends

 
(1,446
)
 
(1,163
)
 
(4,450
)
Deemed dividends related to beneficial conversion feature of preferred stock
(808
)
 
(4,401
)
 
(1,639
)
 
(6,573
)
Net income (loss) attributable to Ocwen common stockholders
$
(76,189
)
 
$
54,725

 
$
49,273

 
$
164,120

 
 
 
 
 
 
 
 
Earnings (loss) per share attributable to Ocwen common stockholders
 
 
 
 
 
 
 
Basic
$
(0.58
)
 
$
0.40

 
$
0.37

 
$
1.21

Diluted
$
(0.58
)
 
$
0.39

 
$
0.36

 
$
1.17

 
 
 
 
 
 
 
 
Weighted average common shares outstanding
 
 
 
 
 
 
 
Basic
130,551,197

 
135,787,834

 
133,318,381

 
135,705,892

Diluted
130,551,197

 
140,057,195

 
136,881,326

 
139,747,490


The accompanying notes are an integral part of these unaudited consolidated financial statements

4


OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in thousands)

 
For the Three Months Ended September 30,
 
For the Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
 
 
 
(As Restated)

 
 
 
(As Restated)

Net income (loss)
$
(75,258
)
 
$
60,572

 
$
52,240

 
$
175,143

 
 
 
 
 
 
 
 
Other comprehensive income (loss), net of income taxes:
 

 
 

 
 
 
 

Change in deferred loss on cash flow hedges arising during the year (1)

 

 

 
(7,537
)
Reclassification adjustment for losses on cash flow hedges included in net income (2)
384

 
4,714

 
1,362

 
6,198

Net change in deferred loss on cash flow hedges
384

 
4,714

 
1,362

 
(1,339
)
Other
2

 
31

 
5

 
711

Total other comprehensive income (loss), net of income taxes
386

 
4,745

 
1,367

 
(628
)
 
 
 
 
 
 
 
 
Comprehensive income (loss)
(74,872
)
 
65,317

 
53,607

 
174,515

Comprehensive income attributable to non-controlling interests
(121
)
 

 
(165
)
 

Comprehensive income (loss) attributable to Ocwen stockholders
$
(74,993
)
 
$
65,317

 
$
53,442

 
$
174,515


(1)
Net of tax benefit of $4.8 million for the nine months ended September 30, 2013 .
(2)
Net of tax expense of $3.1 million for the three months ended September 30, 2013 and $0.2 million and $3.9 million for the nine months ended September 30, 2014 and 2013 , respectively. These losses are reclassified to Other, net in the unaudited Consolidated Statements of Operations. See Note 15 – Derivative Financial Instruments and Hedging Activities for additional information.



The accompanying notes are an integral part of these unaudited consolidated financial statements

5



OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2014 AND 2013
(Dollars in thousands)
 
Ocwen Stockholders
 
 
 
 
 
Common Stock
 
Additional Paid-in
Capital
 
Retained
Earnings
 
Accumulated Other Comprehensive Income (Loss), Net of Taxes
 
Non-controlling Interest in Subsidiaries
 
Total
 
Shares
 
Amount
 
 
 
 
 
Balance at December 31, 2013
135,176,271

 
$
1,352

 
$
818,427

 
$
1,002,963

 
$
(10,151
)
 
$

 
$
1,812,591

Net income

 

 

 
52,075

 

 
165

 
52,240

Preferred stock dividends ($18.75 per share)

 

 

 
(1,163
)
 

 

 
(1,163
)
Deemed dividend related to beneficial conversion feature of preferred stock

 

 

 
(1,639
)
 

 

 
(1,639
)
Conversion of preferred stock
1,950,296

 
20

 
61,980

 


 


 


 
62,000

Repurchase of common stock
(9,920,649
)
 
(99
)
 
(325,510
)
 

 

 

 
(325,609
)
Exercise of common stock options
244,000

 
2

 
1,036

 

 

 

 
1,038

Equity-based compensation and other
17,887

 

 
11,092

 

 

 

 
11,092

Non-controlling interest in connection with the acquisition of a controlling interest in Ocwen Structured Investments, LLC

 

 

 

 

 
2,526

 
2,526

Other comprehensive income, net of income taxes


 

 

 

 
1,367

 

 
1,367

Balance at September 30, 2014
127,467,805

 
$
1,275

 
$
567,025

 
$
1,052,236

 
$
(8,784
)
 
$
2,691

 
$
1,614,443

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2012
135,637,932

 
$
1,356

 
$
911,942

 
$
704,565

 
$
(6,441
)
 
$

 
$
1,611,422

Net income (As Restated)

 

 

 
175,143

 

 

 
175,143

Preferred stock dividends ($27.92 per share)

 

 

 
(4,450
)
 

 

 
(4,450
)
Deemed dividend related to beneficial conversion feature of preferred stock

 

 

 
(6,573
)
 

 

 
(6,573
)
Conversion of preferred stock
3,145,640

 
31

 
99,969

 

 

 

 
100,000

Repurchase of common stock
(3,145,640
)
 
(31
)
 
(157,849
)
 

 

 

 
(157,880
)
Exercise of common stock options
172,969

 
2

 
(188
)
 

 

 

 
(186
)
Equity-based compensation and other
12,031

 

 
10,849

 

 

 

 
10,849

Other comprehensive loss, net of income taxes

 

 

 

 
(628
)
 

 
(628
)
Balance at September 30, 2013 (As Restated)
135,822,932

 
$
1,358

 
$
864,723

 
$
868,685

 
$
(7,069
)
 
$

 
$
1,727,697




The accompanying notes are an integral part of these unaudited consolidated financial statements

6


OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)

For the Nine Months Ended September 30,
 
2014
 
2013
 
 
 
 
(As Restated)

Cash flows from operating activities
 
 

 
 

Net income
 
$
52,240

 
$
175,143

Adjustments to reconcile net income to net cash provided by operating activities:
 
 

 
 

Amortization of mortgage servicing rights
 
186,075

 
197,435

Depreciation
 
16,601

 
17,153

Provision for bad debts
 
49,583

 
22,386

Gain on sale of loans
 
(110,041
)
 
(72,912
)
Realized and unrealized losses on derivative financial instruments
 
1,955

 
12,896

(Gain) loss on extinguishment of debt
 
(2,609
)
 
12,556

Loss (gain) on valuation of mortgage servicing rights, at fair value
 
13,147

 
(11,725
)
Decrease (increase) in deferred tax assets, net
 
35,884

 
(2,393
)
Origination and purchase of loans held for sale
 
(6,007,152
)
 
(7,072,260
)
Proceeds from sale and collections of loans held for sale
 
6,013,059

 
7,006,883

Changes in assets and liabilities:
 
 

 
 

Decrease in advances and match funded advances
 
236,688

 
424,008

(Increase) decrease in receivables and other assets, net
 
(11,806
)
 
265,554

(Decrease) increase in other liabilities
 
46,243

 
27,783

Other, net
 
39,148

 
1,723

Net cash provided by operating activities
 
559,015

 
1,004,230

 
 
 
 
 
Cash flows from investing activities
 
 

 
 

Cash paid to acquire ResCap Servicing Operations (a component of Residential Capital, LLC)
 
(54,220
)
 
(2,260,830
)
Net cash paid to acquire controlling interest in Ocwen Structured Investments, LLC
 
(7,834
)
 

Net cash paid to acquire Liberty Home Equity Solutions, Inc.
 

 
(26,568
)
Net cash acquired in acquisition of Correspondent One S.A.
 

 
22,108

Distributions of capital from unconsolidated entities
 
6,572

 
1,300

Purchase of mortgage servicing rights, net
 
(19,395
)
 
(676,750
)
Acquisition of advances in connection with the purchase of mortgage servicing rights
 
(84,373
)
 
(445,478
)
Acquisition of advances in connection with the purchase of loans
 
(60,482
)
 

Proceeds from sale of advances and match funded advances
 

 
3,492,489

Net proceeds from sale of diversified fee-based businesses to Altisource Portfolio Solutions, SA
 

 
215,700

Proceeds from sale of mortgage servicing rights
 
287

 
21,511

Origination of loans held for investment – reverse mortgages
 
(565,670
)
 
(274,081
)
Principal payments received on loans held for investment - reverse mortgages
 
56,193

 
2,164

Additions to premises and equipment
 
(7,716
)
 
(24,475
)
Other
 
4,270

 
2,947

Net cash (used in) provided by investing activities
 
(732,368
)
 
50,037

 
 
 
 
 
Cash flows from financing activities
 
 

 
 

Repayment of match funded liabilities
 
(329,175
)
 
(2,169,732
)
Proceeds from other secured borrowings
 
4,352,495

 
7,935,374

Repayments of other secured borrowings
 
(4,532,029
)
 
(7,166,050
)
Proceeds from issuance of senior unsecured notes
 
350,000

 

Payment of debt issuance costs
 
(6,835
)
 
(25,547
)
Proceeds from sale of mortgage servicing rights accounted for as a financing
 
123,551

 
404,509

Proceeds from sale of loans accounted for as a financing
 
572,031

 
272,652

Proceeds from sale of advances accounted for as a financing
 
88,095

 

Repurchase of common stock
 
(325,609
)
 
(157,880
)
Payment of preferred stock dividends
 
(1,163
)
 
(4,534
)
Other
 
2,643

 
(5,703
)
Net cash provided by (used in) financing activities
 
294,004

 
(916,911
)
 
 
 
 
 
Net increase in cash
 
120,651

 
137,356

Cash at beginning of year
 
178,512

 
220,130

Cash at end of period
 
$
299,163

 
$
357,486

 
 
 
 
 
Supplemental non-cash investing and financing activities
 
 

 
 

Conversion of Series A preferred stock to common stock
 
$
62,000

 
$
100,000

 
 
 
 
 
Supplemental business acquisition information - ResCap (1)
 
 

 
 

Fair value of assets acquired
 
 

 
 

Advances
 
$

 
$
(1,786,409
)
Mortgage servicing rights
 

 
(401,314
)
Premises and equipment
 

 
(16,423
)
Goodwill
 

 
(211,419
)
Receivables and other assets
 

 
(2,989
)
 
 

 
(2,418,554
)
Fair value of liabilities assumed
 
 

 
 

Accrued expenses and other liabilities
 

 
74,625

Total consideration
 

 
(2,343,929
)
Amount due to seller (2)
 

 
83,099

Cash paid
 
$

 
$
(2,260,830
)
 
(1)
See Note 3 – Business Acquisitions for information regarding the acquisitions of Ocwen Structured Investments, LLC and Correspondent One S.A. during the three months ended March 31, 2014 and 2013, respectively.
(2)
Amount due to seller includes $54.2 million paid in 2014 for certain mortgage servicing rights and related servicing advances which we were obligated to acquire that were not settled as part of the initial closing.


The accompanying notes are an integral part of these unaudited consolidated financial statements

7



OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2014
(Dollars in thousands, except per share data and unless otherwise indicated)
 
Note 1 – Description of Business and Basis of Presentation
Organization
Ocwen Financial Corporation (NYSE: OCN) (Ocwen, we, us and our) is a financial services holding company which, through its subsidiaries, is engaged in the servicing and origination of forward and reverse mortgage loans. Ocwen is headquartered in Atlanta, Georgia with offices throughout the United States (U.S.) and in the United States Virgin Islands (USVI) with support operations in India, the Philippines and Uruguay. Ocwen is a Florida corporation organized in February 1988.
Ocwen owns all of the common stock of its primary operating subsidiary, Ocwen Mortgage Servicing, Inc. (OMS), and directly or indirectly owns all of the outstanding stock of its other primary operating subsidiaries: Ocwen Loan Servicing, LLC (OLS), Ocwen Financial Solutions Private Limited, Homeward Residential, Inc. (Homeward), and Liberty Home Equity Solutions, Inc. (Liberty).
In 2013, we completed acquisitions of mortgage servicing rights (MSRs) and servicing advances from, among others, OneWest Bank, FSB (OneWest MSR Transaction) and Ally Bank, a wholly-owned subsidiary of Ally Financial Inc. (Ally), the indirect parent of Residential Capital, LLC (ResCap) (Ally MSR Transaction), and acquisitions of servicing and origination platforms, including Liberty Home Equity Solutions, Inc. (Liberty) through a stock purchase agreement (Liberty Acquisition) and certain assets and operations of ResCap pursuant to a plan under Chapter 11 of the Bankruptcy Code (ResCap Acquisition). See Note 3 – Business Acquisitions and Note 8 – Mortgage Servicing for additional information.
Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared in conformity with the instructions of the Securities and Exchange Commission (SEC) to Form 10-Q and SEC Regulation S-X, Article 10, Rule 10-01 for interim financial statements. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America (GAAP) for complete financial statements. In our opinion, the accompanying unaudited consolidated financial statements contain all adjustments, consisting only of normal recurring accruals, necessary for a fair presentation. The results of operations and other data for the three and nine months ended September 30, 2014 are not necessarily indicative of the results that may be expected for any other interim period or for the year ending December 31, 2014 . The unaudited consolidated financial statements presented herein should be read in conjunction with the audited consolidated financial statements and related notes thereto included in Amendment 1 to our Annual Report on Form 10-K for the year ended December 31, 2013 .
Reclassifications
Within the Assets section of the Consolidated Balance sheet at December 31, 2013, we reclassified Debt service accounts of $129.9 million to Other assets to conform to the current year presentation.
Certain insignificant amounts in the unaudited Consolidated Statements of Cash Flows for the nine months ended September 30, 2013 have been reclassified to conform to the current year presentation. These reclassifications had no impact on our consolidated cash flows from operating, investing or financing activities.
Use of Estimates and Assumptions
The preparation of financial statements in conformity with GAAP requires that management make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements, the reported amounts of revenues and expenses during the reporting period and the related disclosures in the accompanying notes. Such estimates and assumptions include, but are not limited to, those that relate to fair value measurements, the provision for potential losses that may arise from litigation proceedings, representation and warranty and other indemnification obligations and the valuation of goodwill. In developing estimates and assumptions, management uses all available information; however, actual results could materially differ because of uncertainties associated with estimating the amounts, timing and likelihood of possible outcomes.
Change in Accounting Estimate
For servicing assets or liabilities that we account for using the amortization method, we amortize the balances in proportion to, and over the period of, estimated net servicing income (if servicing revenues exceed servicing costs) or net servicing loss (if servicing costs exceed servicing revenues). We determine estimated net servicing income using the estimated

8



future balance of the underlying mortgage loan portfolio, which, absent new purchases, declines over time from prepayments and scheduled loan amortization. We adjust MSR amortization prospectively in response to changes in estimated projections of future cash flows. As a result of the significant growth and change in composition of our servicing portfolio, we determined that the estimated net servicing income has increased, primarily as a result of lower actual prepayment speeds. We accounted for this change in MSR amortization as a change in an accounting estimate beginning January 1, 2014. This change had the effect of reducing amortization expense and increasing both net income and earnings per share in our unaudited Consolidated Statements of Operations for the three and nine months ended September 30, 2014 as follows:
 
Three Months
 
 Nine Months
Reduction in Amortization of mortgage servicing rights
$
(21,309
)
 
$
(69,244
)
 
 
 
 
Increase in Net income attributable to Ocwen common stockholders
$
14,920

 
$
48,485

 
 
 
 
Increase in Earnings per share attributable to Ocwen common stockholders:
 
 
 
Basic
$
0.11

 
$
0.36

Diluted
$
0.11

 
$
0.35

Recently Issued Accounting Standards
Accounting for Investments in Qualified Affordable Housing Projects (ASU 2014-01)
In January 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-01. The amendments in this ASU permit an entity to make an accounting policy election to account for investments in qualified affordable housing projects using the proportional amortization method, if certain conditions are met. Under the proportional amortization method, an entity amortizes the initial cost of the investment in proportion to the tax credits and other tax benefits received and while recognizing the net investment performance in the statement of operations as a component of income tax expense (benefit).
ASU 2014-01 will be effective for us on January 1, 2015 with early adoption permitted. We are currently evaluating the effect of adopting this standard effective January 1, 2015, but we do not anticipate that our adoption will have a material impact on our consolidated financial condition or results of operations.
Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure (ASU 2014-04)
In January 2014, the FASB issued ASU 2014-04. This ASU clarifies when an in substance repossession or foreclosure occurs such that the loan receivable should be derecognized and the real estate property recognized. An in substance repossession or foreclosure occurs upon either (1) the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure or (2) the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement.
ASU 2014-04 requires interim and annual disclosure of both (1) the amount of foreclosed residential real estate property held by the creditor and (2) the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure according to local requirements of the applicable jurisdiction.
ASU 2014-04 will be effective for us on January 1, 2015 with early adoption permitted. An entity can elect to adopt the amendments using either a modified retrospective transition method or a prospective transition method. We are currently evaluating the effect of adopting this standard effective January 1, 2015, but we do not anticipate that our adoption will have a material impact on our consolidated financial condition or results of operations.
Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity (ASU 2014-08)
In April 2014, the FASB issued ASU 2014-08. ASU 2014-08 changes the criteria for reporting discontinued operations. Under this ASU, a discontinued operation is defined as a disposal of a component or group of components that is disposed of or is classified as held for sale and represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results. A strategic shift could include a disposal of (i) a major geographical area of operations, (ii) a major line of business, (iii) a major equity method investment, or (iv) other major parts of an entity. A business activity that upon acquisition qualifies as held for sale will also be a discontinued operation. The new standard no longer precludes presentation as a discontinued operation if (i) there are operations and cash flows of the component that have not been eliminated from the reporting entity’s ongoing operations, or (ii) there is significant continuing involvement with a component after its disposal.
New disclosures under this ASU include the requirement to present in the statement of cash flows or disclose in a note either (i) total operating and investing cash flows for discontinued operations, or (ii) depreciation, amortization, capital expenditures, and significant operating and investing noncash items related to discontinued operations. Assets and liabilities of

9



a discontinued operation that are classified as held for sale or disposed of in the current period must be reclassified for the comparative periods presented in the balance sheet.
ASU 2014-08 will be effective for us on January 1, 2015. The guidance applies prospectively to new disposals and new classifications of disposal groups as held for sale after the effective date. We are currently evaluating the effect of adopting this standard effective January 1, 2015, but we do not anticipate that our adoption will have a material impact on our consolidated financial condition or results of operations.
Revenue from Contracts with Customers (ASU 2014-09)
In May 2014, the FASB issued ASU 2014-09 to clarify the principles for recognizing revenue and to develop a common revenue standard. Under this new standard, an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. An entity should recognize revenue through the following five-step process:
Step 1: Identify the contract(s) with a customer.
Step 2: Identify the performance obligations in the contract.
Step 3: Determine the transaction price.
Step 4: Allocate the transaction price to the performance obligations in the contract.
Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation.
This standard will also require enhanced disclosures. Qualitative and quantitative information is required regarding (i) contracts with customers-including revenue and impairments recognized, disaggregation of revenue, and information about contract balances and performance obligations, (ii) significant judgments and changes in judgments-determining the timing of satisfaction of performance obligations and determining the transaction price and amounts allocated to performance obligations and (iii) assets recognized from the costs to obtain or fulfill a contract.
ASU 2014-09 will be effective for us on January 1, 2017. Early application is not permitted. An entity should apply the amendments in this ASU either retrospectively to each prior reporting period presented or retrospectively with the cumulative effect recognized at the date of initial application.
The guidance in this standard does not apply to financial instruments and other contractual rights or obligations within the scope of ASC 860, Transfers and Servicing. We are currently evaluating the effect of adopting this standard.
Repurchase-to-Maturity Transactions, Repurchase Financings and Disclosures (ASU 2014-11)
In June 2014, the FASB issued ASU 2014-11. The amendments in this ASU require changes in the accounting for repurchase-to-maturity transactions and repurchase to financing arrangements. A repurchase-to-maturity transaction (repurchase agreement that matures at the same time as the transferred financial asset) will now be accounted for as a secured borrowing. For a repurchase financing arrangement (a type of repurchase agreement), a transfer of a financial asset executed contemporaneously with a repurchase agreement with the same counterparty will be accounted for separately, which will result in secured borrowing accounting for the repurchase agreement. Transferors will no longer apply the “linked” accounting model.
The amendments in this ASU also include enhanced disclosure requirements. An entity will be required to disclose information about certain transactions accounted for as a sale in which the transferor retains substantially all of the exposure to the economic return on the transferred financial assets through an agreement with the same counterparty. An entity also will be required to disclose information about repurchase agreements, securities lending transactions and repurchase-to-maturity transactions that are accounted for as secured borrowings.
The accounting changes in ASU 2014-11 will be effective for us on January 1, 2015. The disclosure requirements for certain transactions accounted for as a sale is required to be presented for interim and annual periods beginning January 1, 2015, and the disclosure for repurchase agreements, securities lending transactions, and repurchase-to-maturity transactions accounted for as secured borrowings is required to be presented for annual periods beginning January 1, 2015, and for interim periods beginning after April 1, 2015. Early application for a public business entity is prohibited. We are currently evaluating the effect of adopting this standard, but we do not anticipate that our adoption will have a material impact on our consolidated financial condition or results of operations.
Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period (ASU 2014-12)
In June 2014, the FASB issued ASU 2014-12 to codify a final consensus reached by the EITF at its March 2014 meeting that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition rather than a condition that affects the grant-date fair value.
The provisions of ASU 2014-12 will be effective for us on January 1, 2015 with early adoption permitted. Entities may apply the amendments in this ASU either (a) prospectively to all awards granted or modified after the effective date or (b)

10



retrospectively to all awards with performance targets that are outstanding as of the beginning of the earliest annual period presented in the financial statements and to all new or modified awards thereafter. We are currently evaluating the effect of adopting this standard effective January 1, 2015. We currently do not have any share-based payment awards outstanding that contain performance targets, and therefore we anticipate that our adoption will not have an impact on our consolidated financial condition or results of operations.
Measuring the Financial Assets and the Financial Liabilities of a Consolidated Collateralized Financing Entity (ASU 2014-13)
In August 2014, the FASB issued ASU 2014-013. When a reporting entity elects the measurement alternative included in this ASU for a consolidated collateralized financing entity, the reporting entity should measure both the financial assets and the financial liabilities of that collateralized financing entity in its consolidated financial statements using the more observable of the fair value of the financial assets and the fair value of the financial liabilities. A collateralized financing entity is a variable interest entity with no more than nominal equity that holds financial assets and issues beneficial interests in those financial assets; the beneficial interests have contractual recourse only to the related assets of the collateralized financing entity and are classified as financial liabilities.
ASU 2014-13 will be effective for us on January 1, 2016, with early adoption permitted at the beginning of an annual period. An entity can elect to adopt the amendments using either a modified retrospective approach or retrospectively to all relevant prior periods. We are currently evaluating the effect of adopting this standard.
Classification of Certain Government-Guaranteed Mortgage Loans upon Foreclosure (ASU 2014-14)
In August 2014, the FASB issued ASU 2014-014. The amendments in this ASU require that a mortgage loan be derecognized and that a separate other receivable be recognized upon foreclosure if the following conditions are met:
1.
The loan has a government guarantee that is not separable from the loan before foreclosure.
2.
At the time of foreclosure, the creditor has the intent to convey the real estate property to the guarantor and make a claim on the guarantee, and the creditor has the ability to recover under that claim.
3.
At the time of foreclosure, any amount of the claim that is determined on the basis of the fair value of the real estate is fixed.
Upon foreclosure, the separate other receivable should be measured based on the amount of the loan balance (principal and interest) expected to be recovered from the guarantor.
ASU 2014-14 will be effective for us on January 1, 2015. An entity should adopt the amendments using either a prospective transition method or a modified retrospective transition method. We are currently evaluating the effect of adopting this standard.

Note 1A — Restatement of Previously Issued Consolidated Financial Statements
Subsequent to the issuance of our original Form 10-K for the year ended December 31, 2013, and our original Form 10-Q for the quarter ended March 31, 2014, we determined there was an error in the accounting for a financing liability related to the Rights to MSRs sold to Home Loan Servicing Solutions, Ltd. and its wholly-owned subsidiary, HLSS Holdings, LLC (collectively HLSS). The error relates to the subsequent accounting for the financing liability at fair value and does not impact the initial accounting for the sale of Rights to MSRs to HLSS. As a result, the financial amounts noted below have been restated from amounts previously reported.

11



The following tables summarize the effect of these restatements on our previously reported amounts.
 
Consolidated Statement of Operations for the Three Months Ended September 30, 2013
 
As Reported
 
Restatement
 
As Restated
Interest expense
$
(110,055
)
 
$
(6,830
)
 
$
(116,885
)
Total other expense, net
(108,705
)
 
(6,830
)
 
(115,535
)
Income before income taxes
76,275

 
(6,830
)
 
69,445

Income tax expense
9,273

 
(400
)
 
8,873

Net income
67,002

 
(6,430
)
 
60,572

Net income attributable to Ocwen common stockholders
61,155

 
(6,430
)
 
54,725

Earnings per share attributable to Ocwen common stockholders
 
 
 
 
 
Basic
$
0.45

 
$
(0.05
)
 
$
0.40

Diluted
$
0.44

 
$
(0.05
)
 
$
0.39

 
Consolidated Statement of Operations for the Nine Months Ended September 30, 2013
 
As Reported
 
Restatement
 
As Restated
Interest expense
$
(303,339
)
 
$
(16,225
)
 
$
(319,564
)
Total other expense, net
(306,780
)
 
(16,225
)
 
(323,005
)
Income before income taxes
215,120

 
(16,225
)
 
198,895

Income tax expense
26,250

 
(2,498
)
 
23,752

Net income
188,870

 
(13,727
)
 
175,143

Net income attributable to Ocwen common stockholders
177,847

 
(13,727
)
 
164,120

Earnings per share attributable to Ocwen common stockholders
 
 
 
 
 
Basic
$
1.31

 
$
(0.10
)
 
$
1.21

Diluted
$
1.27

 
$
(0.10
)
 
$
1.17

 
Consolidated Statement of Comprehensive Income for the Three Months Ended September 30, 2013
 
As Reported
 
Restatement
 
As Restated
Net income
$
67,002

 
$
(6,430
)
 
$
60,572

Comprehensive income
71,747

 
(6,430
)
 
65,317

 
Consolidated Statement of Comprehensive Income for the Nine Months Ended September 30, 2013
 
As Reported
 
Restatement
 
As Restated
Net income
$
188,870

 
$
(13,727
)
 
$
175,143

Comprehensive income
188,242

 
(13,727
)
 
174,515

 
Consolidated Statement of Changes in Equity for the Nine Months Ended September 30, 2013
 
As Reported
 
Restatement
 
As Restated
Net income
$
188,870

 
$
(13,727
)
 
$
175,143


12



 
Consolidated Statement of Cash Flows for the Nine Months Ended September 30, 2013
 
As Reported
 
Restatement
 
As Restated
Net income
$
188,870

 
$
(13,727
)
 
$
175,143

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
 
Decrease (increase) in deferred tax assets, net
105

 
(2,498
)
 
(2,393
)
Net cash provided by operating activities
1,020,455

 
(16,225
)
 
1,004,230

Repayments of other secured borrowings
(7,182,275
)
 
16,225

 
(7,166,050
)
Net cash used in financing activities
(933,136
)
 
16,225

 
(916,911
)

Note 2 – Securitizations and Variable Interest Entities
We securitize, sell and service forward and reverse residential mortgage loans and regularly transfer financial assets in connection with asset-backed financing arrangements. We have aggregated these securitizations and asset-backed financing arrangements into two groups: (1) securitizations of residential mortgage loans and (2) financings of advances on loans serviced for others.
We have determined that the special purpose entities (SPEs) created in connection with our match funded advance financing facilities are variable interest entities (VIEs) of which we are the primary beneficiary.
Securitizations of Residential Mortgage Loans
Currently, we securitize forward and reverse residential mortgage loans involving the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac) (collectively the GSEs) and loans insured by the Federal Housing Authority (FHA) or Department of Veterans Affairs (VA). We retain the right to service these loans and receive servicing fees based upon the securitized loan balances and certain ancillary fees, all of which are reported in Servicing and subservicing fees on the unaudited Consolidated Statements of Operations.
Transfers of Forward Loans
We sell or securitize forward loans that we originate or that we purchase from third parties, generally in the form of mortgage-backed securities guaranteed by the GSEs or the Government National Mortgage Association (Ginnie Mae). Securitization usually occurs within 30 days of loan closing or purchase. We retain servicing rights associated with the transferred loans and receive a servicing fee for services provided. We act only as a fiduciary and do not have a variable interest in the securitization trusts. As a result, we account for these transactions as sales upon transfer.
We report the gain or loss on the transfer of the loans held for sale in Gain on loans held for sale, net in the unaudited Consolidated Statements of Operations along with changes in fair value of the loans and the gain or loss on the related derivatives. See Note 15 – Derivative Financial Instruments and Hedging Activities for information on these derivative financial instruments. We include all changes in loans held for sale and related derivative balances in operating activities in the unaudited Consolidated Statements of Cash Flows.
The following table presents a summary of cash flows received from and paid to securitization trusts related to transfers accounted for as sales that were outstanding during the three and nine months ended September 30 :
 
Three Months
 
 Nine Months
 
2014
 
2013
 
2014
 
2013
Proceeds received from securitizations
$
1,369,468

 
$
1,776,309

 
$
4,346,991

 
$
6,240,459

Servicing fees collected
10,840

 
6,317

 
25,174

 
13,125

Purchases of previously transferred assets, net of claims reimbursed
2,237

 

 
2,237

 

 
$
1,382,545

 
$
1,782,626

 
$
4,374,402

 
$
6,253,584

In connection with these transfers, we retained MSRs of $10.7 million and $32.1 million during the three and nine months ended September 30, 2014 , respectively, and $16.3 million and $63.2 million during the three and nine months ended September 30, 2013 , respectively. We initially record the MSRs at fair value and subsequently account for them at amortized cost. See Note 8 – Mortgage Servicing for information relating to MSRs.

13



Certain obligations arise from agreements associated with our transfers of loans. Under these agreements, we may be obligated to repurchase the loans, or otherwise indemnify or reimburse the investor or insurer for losses incurred due to material breach of contractual representations and warranties. See Note 12 – Other Liabilities for further information.
The following table presents the carrying amounts of our assets that relate to our continuing involvement with forward loans that we have transferred with servicing rights retained as well as our maximum exposure to loss including the unpaid principal balance (UPB) of the transferred loans at the dates indicated:
 
September 30, 2014
 
December 31, 2013
Carrying value of assets:
 
 
 
Mortgage servicing rights, at amortized cost
$
84,397

 
$
44,615

Mortgage servicing rights, at fair value
2,965

 
3,075

Advances and match funded advances
10,153

 
15,888

Unpaid principal balance of loans transferred (1)
8,816,416

 
5,641,277

Maximum exposure to loss
$
8,913,931

 
$
5,704,855

(1)
The UPB of the loans transferred is the maximum exposure to loss under our standard representations and warranties obligations.
At September 30, 2014 and December 31, 2013 , 4.4% and 2.6% , respectively, of the transferred residential loans that we service were 30 days or more past due. During the three and nine months ended September 30, 2014 , there were no charge-offs, net of recoveries, associated with these transferred loans.
Transfers of Reverse Mortgages
We are an approved issuer of Ginnie Mae Home Equity Conversion Mortgage-Backed Securities (HMBS) that are guaranteed by Ginnie Mae. We originate Home Equity Conversion Mortgages (HECMs, or reverse mortgages) that are insured by the FHA. We then pool the loans into HMBS that we sell into the secondary market with servicing rights retained. We have determined that loan transfers in the HMBS program do not meet the definition of a participating interest because of the servicing requirements in the product that require the issuer/servicer to absorb some level of interest rate risk, cash flow timing risk and incidental credit risk. As a result, the transfers of the HECMs do not qualify for sale accounting, and we, therefore, account for these transfers as financings. Under this accounting treatment, the HECMs are classified as Loans held for investment - reverse mortgages, at fair value, on our unaudited Consolidated Balance Sheets. We record the proceeds from the transfer of assets as secured borrowings (HMBS-related borrowings) in Financing liabilities and recognize no gain or loss on the transfer. Holders of participating interests in the HMBS have no recourse against the assets of Ocwen, except for standard representations and warranties and our contractual obligation to service the HECMs and the HMBS.
We have elected to measure the HECMS and HMBS-related borrowings at fair value. The changes in fair value of the HECMs and HMBS-related borrowings are included in Other revenues in our unaudited Consolidated Statements of Operations. Included in net fair value gains on the HECMs and related HMBS borrowings are the interest income that we expect to be collected on the HECMs and the interest expense that we expect to be paid on the HMBS-related borrowings. We report originations and collections of HECMs in investing activities in the unaudited Consolidated Statements of Cash Flows. We report net fair value gains on HECMs and the related HMBS borrowings as an adjustment to the net cash provided by or used in operating activities in the unaudited Consolidated Statements of Cash Flows. Proceeds from securitizations of HECMs and payments on HMBS-related borrowings are included in financing activities in the unaudited Consolidated Statements of Cash Flows.
At September 30, 2014 and December 31, 2013 , we had HMBS-related borrowings of $1.2 billion and $615.6 million and HECMs pledged as collateral to the pools of $1.3 billion and $618.0 million , respectively. See Note 4 – Fair Value for a reconciliation of the changes in fair value of HECMs and HMBS-related borrowings.
Financings of Advances on Loans Serviced for Others
Match funded advances on loans serviced for others result from our transfers of residential loan servicing advances to SPEs in exchange for cash. We consolidate these SPEs because Ocwen is the primary beneficiary of the SPE. These SPEs issue debt supported by collections on the transferred advances.
We make the transfers to these SPEs under the terms of our advance financing facility agreements. We classify the transferred advances on our unaudited Consolidated Balance Sheets as Match funded advances and the related liabilities as Match funded liabilities. The SPEs use collections of the pledged advances to repay principal and interest and to pay the expenses of the SPE. Holders of the debt issued by these entities can look only to the assets of the SPE for satisfaction of the

14



debt and have no recourse against Ocwen. However, Ocwen and OLS have guaranteed the payment of the obligations under the securitization documents of one of the entities. The maximum amount payable under the guarantee is limited to 10% of the notes outstanding at the end of the facility’s revolving period in December 2014. The entity to which this guarantee applies had $5.0 million of notes outstanding at September 30, 2014 . The assets and liabilities of the advance financing SPEs are comprised solely of Match funded advances, Debt service accounts, Match funded liabilities and amounts due to affiliates. Amounts due to affiliates are eliminated in consolidation in our unaudited Consolidated Balance Sheets.
See Note 7 – Match Funded Advance s, Note 10 – Other Assets and Note 11 – Borrowings for additional information.

Note 3 – Business Acquisitions
We account for business acquisitions using the acquisition method which requires, among other things, that the assets acquired and liabilities assumed be recognized at their fair values as of the acquisition date. The initial allocation of the purchase price is considered preliminary and therefore subject to change until the end of the measurement period which can extend up to one year from the acquisition date. Goodwill is calculated as the excess of the consideration transferred over the net assets recognized and represents the expected revenue and cost synergies of the combined business. Measurement period adjustments are applied retrospectively to the period of acquisition.
The purchase price allocations provided below for our business acquisitions are based on the estimated fair value of the acquired receivables, loans, advances, MSRs and the assumed debt in a manner consistent with the methodology described in Note 4 – Fair Value . Premises and equipment were initially valued based on the “in-use” valuation premise, where the fair value of an asset is based on the highest and best use of the asset that would provide maximum value to market participants principally through its use with other assets as a group. Other assets and liabilities expected to have a short life were valued at the face value of the specific assets and liabilities purchased, including receivables, prepaid expenses, accounts payable and accrued expenses.
The unaudited pro forma consolidated results presented below for the ResCap Acquisition are not indicative of what Ocwen’s consolidated net earnings would have been had we completed the acquisition on the date indicated because of differences in servicing practices and cost structure between Ocwen and ResCap. In addition, the unaudited pro forma consolidated results do not purport to project our combined future results nor do they reflect the expected realization of any cost savings associated with the acquisition.
The acquisition of Liberty was treated as stock purchases for U.S. tax purposes. The ResCap Acquisition was treated as an asset acquisition for U.S. tax purposes. We expect the opening tax basis for the acquired assets and liabilities to be the fair values as shown in the purchase price allocation table below. We expect MSRs and goodwill to be treated as intangible assets acquired in connection with the purchase of a trade or business and, as such, amortized over 15 years for tax purposes.
Purchase Price Allocation
The following table summarizes the fair values of assets acquired and liabilities assumed as part of the ResCap Acquisition:
Purchase Price Allocation
 
February 15, 2013
 
Adjustments
 
Final
MSRs (1)
 
$
393,891

 
$
7,423

 
$
401,314

Advances and match funded advances (1)
 
1,622,348

 
164,061

 
1,786,409

Deferred tax assets
 

 

 

Premises and equipment
 
22,398

 
(5,975
)
 
16,423

Receivables and other assets
 
2,989

 

 
2,989

Other liabilities:
 


 


 


Liability for indemnification obligations
 
(49,500
)
 

 
(49,500
)
Other
 
(24,840
)
 
(285
)
 
(25,125
)
Total identifiable net assets
 
1,967,286

 
165,224

 
2,132,510

Goodwill
 
204,743

 
6,676

 
211,419

Total consideration
 
$
2,172,029

 
$
171,900

 
$
2,343,929

(1)
As of the acquisition date, the purchase of certain MSRs from ResCap was not complete pending the receipt of certain consents and court approvals. Subsequent to the acquisition, we obtained the required consents and approvals for a portion of these MSRs and paid an additional purchase price of $174.6 million to acquire the MSRs and related

15



advances, including $54.2 million in 2014. The purchase price allocation has been revised to include the resulting adjustments to MSRs, advances and goodwill.
ResCap Acquisition
We completed the ResCap Acquisition on February 15, 2013. We acquired MSRs related to conventional (i.e., conforming to the underwriting standards of Fannie Mae or Freddie Mac; collectively referred to as Agency loans), government insured (loans insured by FHA or VA) and non-Agency residential forward mortgage loans (commonly referred to as non-prime, subprime or private-label loans) with a UPB of $111.2 billion and master servicing agreements with a UPB of $44.9 billion . The ResCap Acquisition included advances and elements of the servicing platform related to the acquired MSRs, as well as certain diversified fee-based business operations that included recovery, title and closing services. We also assumed subservicing contracts with a UPB of $27.0 billion . Under the terms of the ResCap Acquisition, we were obligated to acquire certain servicing rights and subservicing agreements that were not settled as part of the initial closing on February 15, 2013 as a result of objections raised in connection with the sale. We purchased these MSRs and assumed the subservicing contracts from ResCap when such consents and approvals were obtained. We completed subsequent settlements and purchased additional MSRs, as objections were resolved.
To finance the ResCap Acquisition, we deployed $840.0 million from the proceeds of a new $1.3 billion senior secured term loan (SSTL) facility and borrowed an additional $1.2 billion pursuant to two new servicing advance facilities and one existing facility. We settled the subsequent closings with cash. Ocwen assumed certain limited liabilities as part of the transaction, including certain employee liabilities and certain business payables outstanding at the closing date. Under the agreement with ResCap, Ocwen generally did not assume any contingent obligations, including pending or threatened litigation, financial obligations in connection with any settlements, orders or similar agreements entered into by ResCap or obligations in connection with any representations or warranties associated with loans previously sold by ResCap except for litigation that may arise in the ordinary course of servicing mortgage loans relating to servicing agreements assumed by Ocwen. Ocwen assumed all liabilities related to servicing loans that are guaranteed by Ginnie Mae, whether arising prior to or after the closing date.
Post-Acquisition Results of Operations
The following table presents the revenue and earnings of the ResCap operations that are included in our unaudited Consolidated Statements of Operations for the three and nine months ended September 30, 2013 (from the acquisition date of February 15, 2013):
 
Three Months
 
 Nine Months
Revenues
$
212,164

 
$
508,589

Net income
$
8,230

 
$
81,362

Pro Forma Results of Operations
The following table presents unaudited supplemental pro forma information for Ocwen for the nine months ended September 30, 2013 as if the ResCap Acquisition occurred on January 1, 2012. Pro forma adjustments include:
conforming servicing revenues to the revenue recognition policies followed by Ocwen;
conforming the accounting for MSRs to the valuation and amortization policies of Ocwen;
adjusting interest expense to eliminate the pre-acquisition interest expense of ResCap and to recognize interest expense as if the acquisition-related debt of Ocwen had been outstanding at January 1, 2012; and
reporting acquisition-related charges for professional services as if they had been incurred in 2012 rather than 2013.
Revenues
$
1,530,055

Net income
$
205,062

Other Acquisitions
Correspondent One S.A. (Correspondent One)
On March 31, 2013, we increased our ownership in Correspondent One, an entity formed with Altisource Portfolio Solutions, SA (Altisource) in March 2011, from 49% to 100% . Correspondent One facilitated the purchase of conventional and government insured residential mortgages from approved mortgage originators and resold the mortgages to secondary market investors. We acquired the shares of Correspondent One held by Altisource ( 49% interest) for $12.6 million and acquired the remaining shares held by an unrelated entity for $0.9 million . We accounted for this transaction as an acquisition and recognized the assets acquired and liabilities assumed at their fair values as of the acquisition date. The acquired net assets were $26.4 million and consisted primarily of cash ( $23.0 million ) and residential mortgage loans ( $1.1 million ). We remeasured our

16



previously held investment, which we accounted for using the equity method, at fair value and recognized a loss of $0.4 million . We did not recognize goodwill in connection with this acquisition. Correspondent One is not material to our financial condition, results of operations or cash flows.
Liberty
On April 1, 2013, we completed the Liberty Acquisition for $22.0 million in cash. In addition, and as part of the closing, Ocwen repaid Liberty’s $9.1 million existing outstanding debt to the sellers. Liberty is engaged in the origination, purchase, sale and securitization of reverse mortgage loans, both retail and wholesale. We acquired Liberty’s reverse mortgage origination platform, including reverse mortgage loans with a UPB of $55.2 million . The acquired net assets were $31.1 million and consisted primarily of residential reverse mortgage loans ( $60.0 million ), receivables ( $11.2 million ), loans held for investment ( $10.3 million ) and cash ( $4.6 million ) less amounts due under warehouse facilities ( $46.3 million ) and HMBS-related borrowings ( $10.2 million ). We recognized $3.0 million of goodwill in connection with this acquisition. The acquisition of Liberty did not have a material impact on our financial condition, results of operations or cash flows.
Ocwen Structured Investments, LLC (OSI)
On January 31, 2014, we increased our ownership in OSI from 26.00% to 87.35% . OSI invests primarily in residential MSRs and the related lower tranches and residuals of mortgage-backed securities. We acquired the additional interest in OSI for $11.0 million . We accounted for this transaction as an acquisition and recognized 100% of the assets acquired and liabilities assumed at their fair values as of the acquisition date. We recognized in equity a noncontrolling interest at its proportionate 12.65% share of the net assets acquired. The acquired net assets were $20.0 million and consisted primarily of MSRs ( $9.0 million ), mortgage-backed securities ( $7.7 million ) and cash ( $3.2 million ). The acquisition of OSI did not have a material impact on our financial condition, results of operations or cash flows.
Facility Closure Costs
We have incurred employee termination benefits, primarily consisting of severance and Worker Adjustment and Retraining Notification Act compensation, lease termination costs for the closure of leased facilities and other contract termination costs in connection with our business acquisitions. The following table provides a reconciliation of the beginning and ending liability balances for these termination costs for the nine months ended September 30, 2014 :
 
Employee termination benefits
 
Lease and other contract termination costs
 
Total
Liability balance as at December 31, 2013
$
4,816

 
$
7,432

 
$
12,248

Additions charged to operations (1)
14,748

 
2,813

 
17,561

Amortization of discount

 
115

 
115

Payments
(17,215
)
 
(2,928
)
 
(20,143
)
Liability balance as at September 30, 2014 (2)
$
2,349

 
$
7,432

 
$
9,781

(1)
Of the additions charged to operations during the period, $14.4 million was recognized in the Servicing segment, $(0.1) million was recognized in the Lending segment and the remaining $3.3 million was recognized in the Corporate Items and Other segment. Charges related to employee termination benefits, lease termination costs and other contract termination costs are reported in Compensation and benefits expense, Occupancy and equipment expense and Other operating expenses, respectively, in the unaudited Consolidated Statements of Operations. The liabilities are included in Other liabilities in the unaudited Consolidated Balance Sheet.
(2)
We expect the remaining liability for employee termination benefits at September 30, 2014 to be settled in late 2014 or early 2015.
Note 4 – Fair Value
Fair value is estimated based on a hierarchy that maximizes the use of observable inputs and minimizes the use of unobservable inputs. Observable inputs are inputs that reflect the assumptions that market participants would use in pricing the asset or liability developed based on market data obtained from sources independent of the reporting entity. Unobservable inputs are inputs that reflect the reporting entity’s own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. The fair value hierarchy prioritizes the inputs to valuation techniques into three broad levels whereby the highest priority is given to Level 1 inputs and the lowest to Level 3 inputs.
Level 1:
Quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity can access at the measurement date.

17



Level 2:
Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly.
Level 3:
Unobservable inputs for the asset or liability.
We classify assets in their entirety based on the lowest level of input that is significant to the fair value measurement.
The carrying amounts and the estimated fair values of our financial instruments and our nonfinancial assets measured at fair value on a recurring or non-recurring basis are as follows at the dates indicated:
 
 
 
September 30, 2014
 
December 31, 2013
 
Level
 
Carrying Value
 
Fair Value
 
Carrying Value
 
Fair Value
Financial assets:
 
 
 

 
 

 
 

 
 

Loans held for sale:
 
 
 
 
 
 
 
 
 
Loans held for sale, at fair value (a)
2
 
$
335,950

 
$
335,950

 
$
503,753

 
$
503,753

Loans held for sale, at lower of cost or fair value (b)
3
 
71,937

 
71,937

 
62,907

 
62,907

Total Loans held for sale
 
 
$
407,887

 
$
407,887

 
$
566,660

 
$
566,660

Loans held for investment - Reverse mortgages, at fair value (a)
3
 
$
1,315,324

 
$
1,315,324

 
$
618,018

 
$
618,018

Advances and match funded advances (c)
3
 
3,346,865

 
3,346,865

 
3,443,215

 
3,443,215

Receivables, net (c)
3
 
245,817

 
245,817

 
152,516

 
152,516

 
 
 
 
 
 
 
 
 
 
Financial liabilities:
 
 
 

 
 

 
 

 
 

Match funded liabilities (c)
3
 
$
2,035,639

 
$
2,035,639

 
$
2,364,814

 
$
2,364,814

Financing liabilities:
 
 
 
 
 
 
 
 
 
HMBS-related borrowings, at fair value (a)
3
 
$
1,236,094

 
$
1,236,094

 
$
615,576

 
$
615,576

Financing liability - MSRs pledged (a)
3
 
618,855

 
618,855

 
633,804

 
633,804

Other (c)
3
 
202,541

 
206,261

 
17,593

 
17,593

Total Financing liabilities
 
 
$
2,057,490

 
$
2,061,210

 
$
1,266,973

 
$
1,266,973

Other secured borrowings:
 
 
 
 
 
 
 
 
 
Senior secured term loan (c)
3
 
$
1,276,142

 
$
1,259,601

 
$
1,284,901

 
$
1,270,108

Other (c)
3
 
390,285

 
390,285

 
492,768

 
492,768

Total Other secured borrowings
 
 
$
1,666,427

 
$
1,649,886

 
$
1,777,669

 
$
1,762,876

 
 
 
 
 
 
 
 
 
 
Senior unsecured notes
2
 
$
350,000

 
$
338,625

 
$

 
$

 
 
 
 
 
 
 
 
 
 
Derivative financial instruments (a):
 
 
 

 
 

 
 

 
 

IRLCs
2
 
$
6,117

 
$
6,117

 
$
8,433

 
$
8,433

Forward MBS trades
1
 
(1,089
)
 
(1,089
)
 
6,905

 
6,905

Interest rate caps
3
 
91

 
91

 
442

 
442

 
 
 
 
 
 
 
 
 
 
MSRs:
 
 
 
 
 
 
 
 
 
MSRs, at fair value (a)
3
 
$
101,948

 
$
101,948

 
$
116,029

 
$
116,029

MSRs, at amortized cost (c)
3
 
1,856,818

 
2,364,393

 
1,953,352

 
2,441,719

Total MSRs
 
 
$
1,958,766

 
$
2,466,341

 
$
2,069,381

 
$
2,557,748

(a)
Measured at fair value on a recurring basis.
(b)
Measured at fair value on a non-recurring basis.
(c)
Disclosed, but not carried, at fair value. 

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The following tables present a reconciliation of the changes in fair value of Level 3 assets and liabilities that we measure at fair value on a recurring basis for the three and nine months ended September 30 . The information presented for 2013 has been revised to include Financing liability - MSRs pledged in conformity with the 2014 presentation of Level 3 assets and liabilities.
 
Loans Held for Investment - Reverse Mortgages
 
Financing Liability - MSRs Pledged
 
HMBS-Related Borrowings
 
Derivative Financial Instruments, net
 
MSRs
 
Total
Three months ended September 30, 2014
 
 
 
 
 
 
 
 
 
 
 
Fair value at July 1, 2014
$
1,107,626

 
$
(629,579
)
 
$
(1,033,712
)
 
$
97

 
$
104,220

 
$
(451,348
)
Purchases, issuances, sales and settlements:
 
 
 
 
 
 
 

 
 

 
 

Purchases

 

 

 

 

 

Issuances
208,566

 

 
(190,452
)
 

 

 
18,114

Sales

 

 

 

 

 

Settlements (1)
(27,592
)
 
10,724

 
12,690

 

 
(934
)
 
(5,112
)
 
180,974

 
10,724

 
(177,762
)
 

 
(934
)
 
13,002

Total realized and unrealized gains and (losses):
 
 
 
 
 
 
 

 
 

 
 

Included in earnings
26,724

 

 
(24,620
)
 
(6
)
 
(1,338
)
 
760

Included in Other comprehensive income (loss)

 

 

 

 

 

 
26,724

 

 
(24,620
)
 
(6
)
 
(1,338
)
 
760

Transfers in and / or out of Level 3

 

 

 

 

 

Fair value at September 30, 2014
$
1,315,324

 
$
(618,855
)
 
$
(1,236,094
)
 
$
91

 
$
101,948

 
$
(437,586
)
 
Loans Held for Investment - Reverse Mortgages
 
Financing Liability - MSRs Pledged
 
HMBS-Related Borrowings
 
Derivative Financial Instruments, net
 
MSRs
 
Total
Three months ended September 30, 2013
 
 
 
 
 
 
 
 
 
 
 
Fair value at July 1, 2013
$
76,649

 
$
(437,734
)
 
$
(73,641
)
 
$
176

 
$
97,163

 
$
(337,387
)
Purchases, issuances, sales and settlements:
 
 
 
 
 
 
 

 
 

 
 

Purchases

 

 

 

 

 

Issuances
211,052

 
(239,851
)
 
(206,714
)
 

 

 
(235,513
)
Sales

 

 

 


 

 

Settlements
(1,293
)
 
17,764

 
1,021

 
(176
)
 

 
17,316

 
209,759

 
(222,087
)
 
(205,693
)
 
(176
)